Gov. Dannel P. Malloy's new budget would cancel a planned tax reduction for Connecticut's hospitals two years from now to help reduce big deficits down the road.

The health care component of the governor's proposal for the 2018-19 fiscal year also would leave in place new eligibility restrictions lawmakers ordered last fall for the popular Medicare Savings Plan.

Those restrictions, originally scheduled to take effect last Jan. 1, subsequently were deferred until July 1. They would reduce or eliminate benefits for an estimated 113,000 poor seniors and disabled patients. The program uses Medicaid money to help pay medical expenses that Medicare doesn't cover, such as premiums, deductibles and co-pays.

The new two-year state budget legislators passed last October — with bipartisan support but without direct negotiations with Malloy's budget staff — "includes multiple examples of large revenue diversions scheduled in law to occur in the future … without making hard choices about revenue and spending," the administration wrote in its proposed adjustments for the 2018-19 fiscal year.

Though the next fiscal year is on pace to run modestly in deficit, about $165 million or less than 1 percent of General Fund spending, the gap quickly gets much bigger.

Largely because of surging retirement benefits costs — tied to decades of inadequate state funding — state finances are on pace to run $2.2 billion or 11 percent in deficit in 2019-20 and $2.9 billion or 14 percent in the red in 2020-21, the administration says.

Calling these shortfalls, "self-inflicted wounds," administration officials said the provider tax on hospitals should not be reduced, as planned from $900 million to $384 million in 2020.

Jennifer Jackson, CEO of the Connecticut Hospital Association, called upon state lawmakers to reject the governor's proposal.

"Hospitals remain committed to the agreement we reached with the state during the last legislative session. This agreement, which relies on an increased tax on hospitals to fund the rate increases and increases in supplemental payments through the Medicaid program, benefits the state, hospitals and the patients they serve," Jackson said in a statement on Monday afternoon. "Governor Malloy's proposal to extend increased taxes on hospitals beyond the biennium is inconsistent with the agreement."

Malloy and the hospital industry have been at odds throughout most of his seven-plus years in office.

Increasing federal aid was the goal in 2011 when Malloy and the legislature established a hospital provider tax. The complicated back-and-forth arrangement of taxes drawn from hospitals and state payments back to the industry actually is employed by most states as a means to leverage federal Medicaid assistance.

In 2011, the industry — and not just the state — came out ahead. Hospitals paid $350 million in taxes in the 2011-12 fiscal year but received $400 million from the state, which also made money thanks to larger federal Medicaid grants.

But things began eroding almost right away. And as state government struggled frequently with budget deficits over the past six years, the tax grew while the supplemental payments shrank — despite an increase in the federal reimbursement rate. Last year hospitals paid in a collective $560 million and received about $120 million back — a net loss of $440 million.

This led the hospitals to file a lawsuit which is still pending.

The industry and legislators agreed last fall to increase both the tax rate and the corresponding state payments.

The industry's loss from the tax system will shrink this fiscal year from about $440 million to $220, while the state gains about $137 million. But all of this is predicated upon federal Medicaid officials approving the new tax arrangement, and that hasn't happened yet.

A final component of that deal between lawmakers and the industry called for the $516 million tax cut starting in 2020.

House Speaker Joe Aresimowicz, D-Berlin, didn't discuss specific proposals, but noted Monday that the governor's plan is only the first step in the budget adjustment process.

"The reality is that, starting Wednesday, the legislature takes over, and we all know some of those ideas will likely survive and many won't," the speaker said. "I try to be careful not to dismiss any proposals out of hand, as the budget challenges ahead require that all options be considered by all parties as we move forward to build consensus over the next three months."

Medicare plan facing cutbacks on July 1

Malloy also has been at odds with legislators in recent months over the Medicare Savings Program.

Lawmakers originally decided to tighten program eligibility starting Jan. 1 to save $54 million this fiscal year and an estimated $90 million in 2018-19. But after catching heat for the cutbacks in their districts, lawmakers relented and deferred any restrictions until July 1.

Malloy argued, though, that their effort to restore $54 million for the program and to balance this fiscal year's budget was fraudulent, double-counting savings already taken in the current fiscal year and stripping resources pledged to the 2018-19 budget.

Malloy vetoed their program fix but legislators overrode his veto.

Legislative leaders recently have said they also want to reverse the program cutbacks in the coming fiscal year — or at least scale them back somewhat. But they haven't proposed how to fund that change.

"If it is their intention to continue that program, … then that is money they're going to have to find," Malloy said. "I think that's fair."

Some voiced concern after Malloy revealed his budget plan, saying that rolling back the income eligibility limits hurts some of the state's most vulnerable residents.

"All they did was push it from January to July," said John "Sean" Riccio, a program recipient who suffers from multiple sclerosis. "They are going to screw so many people."

"They are going to have an uprising on their hands and I'm going to be back down there protesting," said Riccio, 52, of Suffield. "You're going to balance the budget on the backs of the poor, sick and elderly."

He has received Medicare Savings Program assistance on and off since he started receiving disability benefits about five years ago.

Kevin Brophy, director of elder law for Connecticut Legal Services, said he understood the state is facing a "serious budget situation, and we think the solution is not cutting programs to our most vulnerable citizens, and that the state should adopt reasonable revenue options."